Globally, 2021 has become a year of recording inflows for funds traded (or ETF), with more than $ 1T in the inflow. Nearly 80 percent of these inflows, or around $ 800 billion in ETF inflows have been in the US, which quickly turned into investment vehicles for retail investors. In India, ETF also has a record year. According to data from AMFI, the other “ETFS” category (which excludes gold ETF) witnessed a large inflow in 2021 – RS ~ 51,000 crores between January and October 2021 while ETF Gold witnessed the inflow of Rs ~ 4,000 crores in the same period.

Dig deeper into numbers, ETF (and funds) only represents nearly 11 percent of all mutual fund assets in India in November 2021, which rose from 8 percent almost a year ago.

Preferences for passive products

The growth of interest in ETF has increased sharply since March 2020 throughout the world, with retail investors around the world using ETFs as an investment tool in the Pandemi market. While the interest and adoption of retail investors in ETFs has been higher in the US, the participation of investors in ETFs in India is largely limited. In particular, in India, the share of lions from ETF participation has become an investor of domestic and foreign institutions. Placing the numbers behind this, 89 percent of investors in ETFs and funds are institutional investors with only 11 percent of retail investors who invest in these products. Compare this with equity-oriented mutual funds, 88 percent of investors in ERU-oriented MF are retail investors with only 12 percent of institutional investors.

The trend was also reflected in the composition of investor ownership published by AMFI in November 2021. While around 21 percent of the institutional investor portfolio was invested in ETF, less than 2 percent of the retail investor portfolio was invested in ETF. The institutional investor portfolio is usually a diverse portfolio with investment in different asset classes / type of mutual fund scheme. In fact, individual investors have around 77 percent in equity-oriented mutual funds that make it a very concentrated portfolio.

Given the data point above, it is clear that most of the inflows of the ETF come from institutional investors with remaining retail participation are quite limited. However, this only shows that the adoption of ETFs among retail investors is only in the initial round. With the advent of new wealth technology firms and social media influencers, awareness about ETF as a reliable investment vehicle has been on a strong uptick. Some advantages for ETFs include:

– A lower cost structure compared to traditional mutual funds

-Easy to transact with. They can be purchased as individual units on exchange similar to stocks

-More liquid because it’s as easy as stock sales

Inherently diversified since investing in a basket of shares as opposed to one stock.

With various advantages that ETF has active mutual funds, 2022 looks like the year where ETF as an investment option is likely to be a mainstream among retail investors like you and me.